Association for Public Policy Analysis & Management

Recently, there has been a push to increase the amount of infrastructure investment, coming both from the new administration in Washington and from the states. There are longer-term reasons for boosting infrastructure spending. But there is little doubt that short-run economic stimulus is one of the goals of an infrastructure push. Despite the attention paid to the need for greater investment, there has been little attention paid to the question of how the increased investment will be financed. There is reason to believe that the method of financing (debt versus current revenues) could have a distinct effect on economic growth in the short-to-medium term. The aim of our study is to assess the relationship between the method of financing public infrastructure and economic growth. There is little literature on this subject. Most of the studies in the existing literature have examined the relationship between long-term debt and current revenue used to finance public infrastructure and overall levels of capital spending (Eberts and Fox, 1992; Temple, 1994; Poterba, 1995; Fisher and Wassmer, 2015)), capital spending volatility (Wang and Hou, 2009), and budget volatility (Hendrick & Crawford, 2016). These studies, while important, do not shed light on the question at hand.

In this study, we plan to extend the previous studies by examining both linear and non-linear effects of the infrastructure financing mix on subnational economic growth. Based on Vogt’s (1994) observation for capital spending at the subnational level, the assumption is that the relationship is non-linear depending on the economic situation, revenue structure, and public financial conditions in each subnational jurisdiction. The unit of analysis is states (including state and local spending and state level economic growth). Panel data models that correct for endogeneity, serial correlation, and other threats to validity will be employed. The results of the study will broaden academic knowledge about the relationships as well as inform state and local policy on infrastructure financing.